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  1. 1. UT System Administration Policy Library -- Policy UTS167 BANKING SERVICES POLICY Responsible Officer: Vice Chancellor for Finance and Business Development Sponsoring Office: Office of Finance Effective Date: September 1, 2007 Last Reviewed: October 5, 2009 Next Scheduled Review: September 1, 2011 Errors or changes to: Exempted from Standard Policy Development Process by: Vice Chancellor for Administration Date: August 21, 2007 CONTENTS Policy Statement Banking Services Depository Collateral Standards Electronic Funds Transfers Rationale Scope Website Address For This Policy Related Statutes, Policies, Requirements Or Standards Contacts Definitions Responsibilities Procedures Forms Tools/Online Processes Appendix POLICY STATEMENT Banking relationships constitute a critical element of cash management affecting the service level and earning potential of the System as well as the safety of its assets. The most cost effective banking services must be obtained for each institution and the best level of service made available to all System institutions. To pursue these goals, System- wide service minimums, internal controls, and collateral requirements have been established. Periodically, System-wide banking proposals will be solicited for the
  2. 2. selection of one or more banks which are to be used by all System institutions. The process used to determine System-wide bank alternatives will utilize a standardized System request for proposal (RFP). Funds held in demand deposits, time deposits, or non-negotiable certificates of deposit shall be deposited or invested only in banks with which the Board of Regents has a depository agreement. The Board delegates to UTIMCO or the Executive Vice Chancellor for Business Affairs authority to execute and deliver depository and custody agreements when such deposit agreements are with banks meeting the then current policies of the Board and are in substantially the form of a standard deposit agreement approved by the Board or, for other agreements, in a form approved by the System Administration Office of General Counsel. Subject to the provisions of Board of Regents’ Rules and Regulations, Rule 10501, the Board delegates to the Chief Business Officer of the institution or the Executive Vice Chancellor for Business Affairs the authority to execute and deliver contracts for banking services with banks that have a depository agreement with the Board. The Board, the Chancellor, and the institutional presidents may not, by law, borrow money from any person, firm, or corporation to be repaid from institutional funds except as specifically authorized by the Legislature. Subject to the general provisions of Board of Regents’ Rules and Regulations, Rule 10501, and, except as otherwise specified in the Regents’ Rules and Regulations, the Board of Regents delegates to the Chancellor and to the Executive Vice Chancellor for Health Affairs the authority to act on behalf of the Board to approve loans of institutional funds, which are not otherwise restricted, to a certified nonprofit health corporation and to execute contracts, agreements, and other documents or instruments related to such loans. This Policy is designed to institute controls and standardize cash management policy elements across the System. Unique institutional requirements may require minor deviations from this policy. Any substantive change must be reviewed and approved by the System Office of Finance. RATIONALE Banking services impact the internal operations and earnings of the System and therefore the services and agreements must be defined clearly and services monitored regularly. Economies of scale gained by consolidated System–wide contracts are designed to reduce System costs overall. System fiduciary responsibilities require controls for cash and electronic transactions with banks and development of internal procedures supporting such transactions must be established, monitored, and reconciled on a timely basis. Lack of sufficient controls can UTS167 Banking Services Policy 2
  3. 3. result in fraud, collusion or loss of assets. Accurate and timely balancing, reconciliation, and automated postings are required for reporting and asset safety. State law and fiduciary requirements mandate controls on pledged collateral to secure assets in event of a bank default or service interruption. SCOPE All institutions and UT System Administration WEBSITE ADDRESS FOR THIS POLICY RELATED STATUTES, POLICIES, REQUIREMENTS OR STANDARDS UT System Administration Policies & Other Policies & Standards Standards UTS166, Cash Management and Texas Public Funds Collateral Act, Texas Cash Handling Policy Government Code Chapter 2257, Texas Board of Regents’ Rules and Occupations Code Chapter 162.001 Regulations, Rule 10501 CONTACTS If you have any questions about UT System Administration Policy UTS 167, Banking Services Policy, contact the following office(s): Office Telephone Email/URL Office of 512-499-4374 Finance UTS167 Banking Services Policy 3
  4. 4. DEFINITIONS ACH Automated Clearing House funds transferred by entry in and through the National Automated Clearinghouse Association (NACHA). Transfers from individual institutions are grouped by bank code and transferred electronically in batch mode reducing wire costs and providing for a chain of warranties between banking institutions. Cash To include coin, currency, electronically reported balances, credit card transactions, money order, travelers checks and all other negotiable items. Certified Nonprofit Health Corporation A nonprofit health corporation that has been authorized by the Board of Regents and certified by the Board of Medical Examiners under Texas Occupations Code Chapter 162.001. Checks Documents reflecting a debt of the payor. Checks may be personal or corporate based upon the credit of the issuer but can also include money orders, cashier checks and US Treasury checks. Collateral Securities pledged by a banking institution to the University which in the case of bankruptcy or failure to pay would be liquidated to repay the University for funds held by the bank. Collateral is pledged to and not owned by the University and supplements FDIC insurance. Collateral Pooling The process whereby depository institutions may consolidate required collateral on multiple public entities for safekeeping and record keeping purposes. Pooling creates a centralized control on the collateral by the State or other entity. Depository A banking institution designated as a public depository for time and/or demand deposits. Public depositories must provide pledged collateral above the FDIC insurance levels to secure public funds. Depository Insurance Insurance provided by the Federal Deposit Insurance Corporation, or its successor, for public funds deposits. Insurance provides coverage for each individual tax identification number (not account) basically indemnifying up to $100,000 with the exception of interest and sinking funds which are indemnified separately as testamentary accounts. UTS167 Banking Services Policy 4
  5. 5. Earnings Credit Rate (ECR) The rate at which funds left in a bank as a compensating balance earn interest from which the institution’s banking fees are paid. [(ECR * collected balance) * days of month / 360 = bank fees] Electronic transmissions and transfers (Electronic Funds Transfers-EFT) Electronic payment mechanisms available through banking institutions using the Federal Reserve Wire System (FedWire) or the National Automated Clearing House Association (NACHA) operating under their specific requirements and standards. FDIC Federal Deposit Insurance Corporation. The Federal Deposit Insurance Corporation is a membership corporation sponsored by the US Government to insure repayment of savings and time deposits if a member bank becomes insolvent. FIRREA The Financial Institutions Resource and Recovery Enforcement Act regulates the actions of the FDIC when apportioning the assets of a failed or converted banking institution. The Act sets minimum standards and limits for collateral agreements with public entities. See Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.) and FDIC Regulations regarding Insurance Coverage 12C.F.R. Part 330. Margin: The percentage above 100% required to accommodate market value fluctuations of pledged collateral. System requirements set a margin of 102% for pledged collateral. PINS Personal identification numbers or codes assigned for security purposes on automated systems. Time and Demand Deposits A time deposit (certificate of deposit) has a set maturity date. A demand deposit is any other form of deposit including checking accounts, interest bearing accounts, NOW accounts, etc. on which the depositing entity may make a demand for its funds. Demand deposits may be interest bearing or non-interest bearing which affects the status of their FDIC insurance coverage. Transfers Electronic transactions usually between accounts within the same banking institution for one customer. Wires UTS167 Banking Services Policy 5
  6. 6. Electronic transactions for the transfer of cash between institutions or individuals by debits/credits to their respective banking institutions. Wires are normally processed through the Federal Reserve’s wire service (FedWire) or internationally through CHIPS. Such wire transfers have no guaranties by either party. RESPONSIBILITIES Board of Regents delegates to UTIMCO or the Executive Vice Chancellor for Business Affairs authority to execute and deliver depository and custody agreements delegates to the Chief Business Officer of the institution or the Executive Vice Chancellor for Business Affairs the authority to execute and deliver contracts for banking services with banks that have a depository agreement with the Board delegates to the Chancellor and to the Executive Vice Chancellor for Health Affairs the authority to act on behalf of the Board to approve loans of institutional funds, which are not otherwise restricted, to a certified nonprofit health corporation and to execute contracts, agreements, and other documents or instruments related to such loans Office of Finance maintain a standard banking service request for proposal (RFP) for use on behalf of the U.T. System Administration and all institutions of the U.T. System competitively solicit banking services proposals for the System and member institutions through a consolidated RFP at least every five years monitor and maintain collateral information System-wide to ensure adequate collateralization of all System depository assets Chief Business Officers (CBO) acquire banking services from financial institutions under contract with the System to assure competitive evaluation at least every five years and conform banking services to the standards set by this policy to include all required services establish authorization levels by position for any transfer or signatory responsibilities under any banking services agreement notify all appropriate banks of authorized individuals for transfers, withdrawals and signatures and maintain current information UTS167 Banking Services Policy 6
  7. 7. assure that bank passwords and PINS are changed on a regular basis, or on the schedule established by the contracted banking institution, not to exceed an annual basis, on all authorized individuals create, approve and provide for annual review of departmental operating procedures for deposits and withdrawals as well as transfer requests in accordance with this policy Department Heads create operating procedures supporting this policy and the Cash Management and Cash Handling Policy for the deposit, withdrawal and transfer of funds from banking institutions establish authorization levels and controls for withdrawals, wires, and transfers by position title UTIMCO administers pooled investment funds for the investment of institutional funds as authorized by the Board of Regents UTS167 Banking Services Policy 7
  8. 8. PROCEDURES ACQUISITION AND MONITORING OF BANKING SERVICES 1. Competitive proposals from banking institutions will be solicited by the System at least every five years. The System’s request for proposal (RFP) will accommodate all institutions of the System and is to be used by all institutions in the System-wide proposal process. 2. Banking services agreements will be executed for no longer than five years. Periodic competitive review assures that the System is receiving the most competitive pricing and is maintaining its technological advantage. 3. Primary depository services should be provided by only one banking institution for each System institution. Additional subsidiary depositories for specific deposit accounts, used primarily for remote locations, may be established when necessary. Subsidiary depositories used in this manner must execute a depository agreement and be required to provide approved collateral if balances exceed the FDIC insurance coverage. Institutions requiring additional banking services depositories must send written justification to the Vice Chancellor for Finance and Business Development to receive authorization prior to execution. 4. The RFP shall be posted on the Texas Comptroller (Electronic State Business Daily) website at a minimum. Objectives for banking services are: a. responsiveness and ability to provide services required, b. banking services costs, and c. experience, references, creditworthy continuity of bank and local bank representation. 5. Compensation for banking services shall be on a fee basis so that all funds are invested at the highest earnings rate at all times. Compensation by compensating balance is only permitted when the bank’s earnings credit rate (ECR) exceeds all alternative rates for investment by more than 15 basis points. Should the ECR of the local depository be 15 basis points or more below alternative earnings rates, the banking arrangement must utilize a fee basis allowing funds to be invested at a higher rate. 6. A standard banking depository agreement shall be established and standardized by the U.T. System Office of General Counsel (OGC) for use on any bank relationship. The agreement will, at a minimum, address collateral requirements and fulfill all requirements of FIRREA. Additional technical service agreements may be executed by the System for specific services provided. All agreements will refer to and comply with the standards and requirements of the System RFP and the fees proposed in response to that RFP. Final agreements must be approved by the Office of General Counsel and executed through the Office of Finance. UTS167 Banking Services Policy 8
  9. 9. 7. Bank charges to each System institution will be monitored against the contracted fees on a monthly basis through an account analysis monitoring worksheet by that institution. Differences will be identified to the bank and corrected by the bank before institutions authorize any analysis debits or direct fee payments for those charges. 8. The internal institutional float on funds should be evaluated and monitored to assure minimum processing time as deposited items move to the banking institution. The potential advantageous use of lockboxes, remote deposits, or other automated services should be considered to speed processing. Evaluation of armored transport services should be included in the evaluation. 9. Reconciliation of all accounts, including merchant services, shall be made within thirty (30) days of receipt. 10. On an annual basis, each institution shall query all local banks to assure that no unauthorized accounts have been established with the institution’s name(s), a similar name, or its tax identification number. 11. Where feasible, institutions (particularly health care collections from third party payers) should utilize automated image matching for remittance data capture (matching payments to outstanding claims) to integrate check and remittance documentation electronically. System Required Banking Services to be Provided by Banks 1. To supplement the institutions’ daily major cash transfers to the Short Term Fund, and except where legally prohibited, sweep account structures to bank overnight investment options should be utilized to ensure all minimal bank-held operating funds are invested at the highest possible rate. Bank sweep alternatives shall include only SEC registered US government and agency or prime money market funds. Sweeps are designed to also minimize collateral risk for the System by eliminating overnight deposits which otherwise must be collateralized. 2. All accounts shall be structured as interest earning. (Balances used for compensating balances when appropriate are defined as earning at the bank’s ECR rate.) 3. Account consolidation shall be a goal at each institution. A internal review and justification of the number and type of accounts at each institution should be part of the acquisition of banking services. The CBO or his designee shall approve and be a signatory on every account established by the institution to assure adequate authorization and disclosure. 4. Use of controlled disbursement accounts should be minimized unless authorized by the CBO and should be used only to maximize daily transfer amounts to UTIMCO funds. 5. Non-repetitive wire and non-batched and non-repetitive ACH transfers shall require dual control on initiation and release of transactions. UTS167 Banking Services Policy 9
  10. 10. 6. No dual signature liability based review is to be required from a banking institution. If a System institution requires dual signatures (mechanical or hand- written) for control purposes, the dual signatures should be required on back-up documentation preferably. The banking contract shall stipulate that the bank is not liable for any audit of dual signatures thereby eliminating unnecessary bank charges attendant to this service. 7. Electronic scanning and depositing of checks shall be used whenever feasible at locations with sufficient volume to reduce float and reduce the liabilities of internal check handling and transfer. All locations shall be reviewed by the CBO or his designee as to the feasibility for this service or other services developed which speed deposit and reduce manual handling of assets. 8. Positive pay (advance reconciliation) shall be applied to all accounts to eliminate fraud on checks with the exception of certain imprest funds or where not allowed under law. 9. Partial or full reconciliation services shall be applied to all active accounts whenever feasible and cost effective to reduce internal System staff time on reconciliation. 10. Stop pays should be minimized through the use of positive pay transactions. All stop pays will be reversed on the positive pay file to ensure non-payment and elimination from the outstanding check file. 11. NSF checks received should be represented through targeted ACH (RCK) if proved cost effective. The CBO or his designee shall review the NSF process periodically to evaluate use of banking services to speed processing and increase collections. 12. ACH origination should be a goal of each institution and is encouraged due the efficiency and cost effectiveness of the payment and receipt method. ACH origination is required on all collection and disbursement transactions over $5,000, if possible. 13. Filters and/or blocks are required on all ACH accounts to prevent unauthorized transactions. The extent of the filters/blocks for the institution shall be reviewed by the CBO or his designee for appropriateness. 14. Bank imaging and truncation of all checks, including deposit documentation, is required to reduce physical document handling. 15. Direct deposit and stored value cards (pay cards) should be evaluated for use whenever feasible for payments through electronic funds to reduce the number of physical checks produced. Note (October 2009): Stored value cards (pay cards) offered under existing banking services agreements are intended to be used only for payroll services and are not intended to be used for any financial aid disbursements. Recently, the U.S. Department of Education has made a determination that a community college system’s debit card program for student loans does not meet regulatory requirements (related to fees assessed to students). Any use of stored value cards or debit card programs for financial aid disbursements must be reviewed and approved by the CBO and OGC in writing. UTS167 Banking Services Policy 10
  11. 11. 16. A local account executive shall be required to be assigned by the bank for local contact and servicing. An annual meeting with the account executive by the CBO or his designee is required to review current services and evaluate other potential services. AUTHORIZED DEPOSITORY COLLATERAL 1. Subject to state law, this policy, and the System’s Banking Request for Proposal (RFP) establish the list of authorized collateral and the System required collateral margins for all System deposits. 2. Authorized collateral for System deposits shall include only: a. Obligations of the United States Government, its agencies and instrumentalities including mortgage backed securities passing the standardized bank test (shock test for volatility). 3. Collateral shall be perfected by receipt of an original safekeeping receipt (or report) received directly from the independent custodian. A copy of the receipt (or report) shall be maintained by the System. 4. A minimum collateral margin of 102% shall be maintained on all deposits to include accrued interest, at all times. The pledging institution shall be made contractually liable for monitoring and maintaining the collateral margins at all times. 5. Collateral shall be safe-kept in an independent financial institution outside the holding company of the pledging institution. A written monthly report shall be provided to the System to include full collateral descriptions and current market value at a minimum. 6. A written collateral agreement shall be executed with every System depository. In order to fulfill the requirements of FIRREA, the contract must: - be in writing - be approved by resolution of the bank’s board or bank’s loan committee - state that it is executed under the terms of FIRREA - reference the System’s authorized types of collateral - require an independent third party custodian - allow for System approved substitutions - require a collateral margin of no less than 102% - require continual monitoring and maintenance of margins by the bank - require that a monthly listing of the collateral be provided to the System 7. Before any deposit of System funds, the controlling depository agreement must be executed and proof of pledged collateral received by the System. 8. Safekeeping confirmations and monthly reports of collateral holdings shall be maintained by the Office of Finance, as necessary. 9. The Office of Finance shall verify the market value of the collateral against the deposits plus accrued interest. a. If insufficient collateral is pledged, the Office of Finance shall immediately contact the bank on a margin call for same day action. b. The written margin call shall be maintained on file. UTS167 Banking Services Policy 11
  12. 12. 10. If substitution or withdrawal of collateral is requested by the bank, the Office of Finance will verify the market value of collateral currently pledged and the level of deposits in the institution. If sufficient value is being substituted or remains in the account, the release will be approved. a. The bank shall be required to move the new securities into safekeeping before the current securities are removed. SECURITY CODES/PINS 1. Any individual assigned authorization for financial transactions and assigned a password, code, or personal identification number (PIN), is personally responsible for securing this code/PIN at all times. Unauthorized release or sharing of any security code/PIN will result in personnel actions up to and including termination. 2. Codes/PINS should be changed periodically in accordance with bank requirements (and for internal codes/PINS on the institution’s own established schedule). Where feasible, code/PIN authorizations should be tied to dollar limits on system transactions. 3. Individuals authorized for financial transactions through an assigned code/PIN will relinquish that code/PIN upon notice of resignation or notice of termination. The code/PIN shall be changed or terminated in all applicable internal and bank systems immediately upon termination of authorized user. 4. The CBO or controlling department heads will provide for an audit of authorized users and their assignments on no less than an annual basis. ELECTRONIC FUNDS TRANSFERS Because of the reduced cost offered by electronic transfers and the System’s ability to control the exact timing of funds transfers, all institutions should use electronic transfers whenever possible for both debit and credit transactions. The CBO or his designee is responsible for the initiation and receipt of all EFT transactions and will provide for wire, ACH, and transfer capability with the depository through the banking services RFP, agreement, and service agreements. 1. All money wires will be made electronically and preferably established on a repetitive basis if feasible. All electronic transactions for the withdrawal or transfer of funds from a banking institution will require action from a minimum of two authorized individuals. a. Establishment of repetitive transaction will require dual review and creation. b. Non-repetitive actions shall require dual initiation/release: one authorized individual to initiate and one to release the wire or transfer. c. A list of the authorized individuals is to be reported to and approved by the CBO or his designee and reviewed at least annually. 2. Approval of checks over specific dollar limits shall be set as policy for each institution by its CBO. System-wide, any check over $ 25,000 will require review by the Accounts Payable Supervisor, or their designee, for review and sign off on the check documentation. UTS167 Banking Services Policy 12
  13. 13. 3. Paper check signatures should be digitized and securitized if possible to prevent fraud 4. Paper check formats and check information should be printed concurrently, if possible. Concurrently printed checks are to replace pre-printed checks which are more prone to fraud through duplication. 5. Voided checks are to be physically modified (punched) to avoid reuse and duplication. 6. Physical checks are to be secured in a locked area at all times and a sequentially numbered log maintained accounting for all physical checks. 7. All wire and transfer transactions are to be reported to the CBO or his designee on a same business day basis according to departmental operating procedures. 8. The CBO shall institute sufficient controls on all transactions to include: a. recording of all wire confirmation numbers as part of the transaction documentation, b. balancing the outgoing files against outgoing bank transactions, c. daily reconciliations of outgoing wires and ACH files, d. limited access to electronic transactions, and e. transfer of EFT information before bank deadlines. 9. The standard Wire Transfer Agreement presented by the bank should be reviewed but should not be changed in any manner without full review by the U.T. System Office of General Counsel (In accordance with the Uniform Commercial Code (Texas Business Code) changes to this document require full documentation by the institution on the reinstitution of modified controls and modifications may impair the System’s comparative negligence protection under the Code.) 10. As a priority, whenever possible, major vendors, repetitive vendors, and granting agencies should be instructed to make payments by ACH on the date due. 11. As a priority, whenever feasible, institutions should institute ACH transfers for all repetitive payments to be made on the date due. 12. Wherever feasible, payroll expenses should be paid by direct deposit or stored value cards (pay cards) if found cost effective. To the extent allowed by law, new employees should be paid through direct deposit. Incoming Electronic Transfers 1. The CBO or his designee must be informed by all departments on a timely basis regarding incoming electronic transfers. 2. Reconciliation on incoming transfers must be made on a daily basis. UTS167 Banking Services Policy 13
  14. 14. FORMS AND TOOLS/ONLINE PROCESSES None APPENDIX None Keywords: banking services, banking, bank, banks, electronic transfers, electronic funds transfers, deposit, deposits, banking service agreement, funds, investment funds, password, passwords, loan, loans, money, financial UTS167 Banking Services Policy 14